The legacy and luck of Vanguard’s Jack Bogle
Reprinted courtesy of MarketWatch.com.
For the past 40 years I have been a big fan of John Bogle (he prefers to be called Jack), and this spring I finally got to meet him in person.
Bogle, as you probably know, is the inventor of the retail index fund as we know it, and founder and former chairman (now retired) of The Vanguard Group, the world’s largest provider of mutual funds.
I spoke to Bogle many times when I had a radio show and he was a guest. Meeting him face-to-face for the first time was one of the thrills of my career.
When I walked into Bogle’s office, the first thing that struck me was his big welcoming smile. He could not have been more gracious.
His office is fairly large, with evidence of numerous projects he’s working on. It’s a fun place, with many stuffed animals scattered around. And (perhaps reflecting his Princeton education) he has lots of books everywhere.
Dressed in casual attire wearing a green sweater, Bogle immediately impressed me with his strong desire to help individual investors — a passion that I share. He was interested in the things I am trying to accomplish and was amazingly easy to talk with.
As I was visiting with Bogle, I couldn’t help noticing that the people who work around him seem to really love him. He treated them with kindness, and regularly eats lunch in the company cafeteria with anybody who wishes to join him.
A true man of the people.
I doubt there is anybody whose work has helped more investors, with his focus on passive investing and rock-bottom costs. Yet when I meet investors across the country, I am often surprised by how many people don’t recognize John Bogle’s name.
To catch you up: As a senior at Princeton University in 1951, Bogle wrote his undergraduate thesis based on a study he did that concluded that most mutual funds didn’t earn any more money for their investors than if they had simply invested in a broad index that represented the stock market as a whole.
Bogle’s research showed that even when a mutual fund’s stockholdings beat the index, management fees and expenses almost always meant that investors got returns less than those of such an index.
Even decades after his senior thesis, when Bogle proposed the S&P 500 index fundSPX, +0.25% , this was a very radical view, and quite unpopular with the relatively small — but comfortable and clubby — mutual-fund industry of the time.
However, Bogle believed in what his research had shown and never wavered.
So it was great fun for me to hear from Bogle about the birth and early days of the Vanguard 500 Index Fund VFINX, +0.06% the first of its kind.
In 1976, Dean Witter tried to launch the fund with a $250 million offering. Bogle recalls this as one of the biggest underwriting failures in finance history: The offering raised only $11 million. Obviously, nobody had a clue that this fund would someday become the largest mutual fund in the world.
At one time, he told me, there was discussion of declaring the fledgling index fund a failure and simply returning the $11 million to the initial investors. But Bogle convinced the fund’s directors that they should continue the experiment, and so it lived on.
As I listened to him talk, I was struck my how lucky he had been to launch this fund when he did.
As Douglas MacArthur once famously said, “The best luck of all is the kind you make for yourself.” Bogle could not have known that the 1976 launch would turn out to make a huge contribution to the fund’s success.
Here’s why: From 1977 through 1999, the S&P 500 index compounded at a rate of 16.2% — about 60% higher than its long-term record of 10%. Even better, during the technology boom of 1995 through 1999, the index compounded at an amazing rate of 28.6%.
In 1999 and 2000, hordes of investors began behaving as if they could make their dreams come true with just this one boring investment, which let them own the biggest and best companies in the U. S. — some said the best in the whole world.
As the money poured in during those heady days, nobody seemed to realize or care that in the 23 years before it was cloned as a mutual fund, the S&P 500 had appreciated at a rate of only 10.4%.
It was even luckier for Jack Bogle and Vanguard that the fund wasn’t launched in December 1999. Even though many investors would have trampled down the doors to get in on the ground floor of such a fund, soon they would have been bitterly disappointed. For the next 17 years, Bogle’s fund compounded at only 4.5%.
Instead of being regarded as a hero, Bogle would have been treated as a goat.
That’s good luck if I ever saw it. And in fact it’s a good reminder that the luck of timing can play a large part in anybody’s long-term investment results.
Since our meeting, I’ve thought a lot about his comments. In one respect, Bogle reminds me of many investors who find strategies that have been successful and who are not much interested in doing something else, even in the face of evidence that the “something else” is likely to provide better long-term risk-adjusted returns.
He believes totally in the U.S. large-cap blend asset class represented by the S&P 500. He shows little interest in the many exhaustive studies that show even better long-term results from investing heavily in value stocks, small-cap stocks and international stocks.
Vanguard does offer index funds and ETFs that represent those other asset classes. But Bogle believes investors will get sufficient value, small-cap and international exposure in the “total market” funds that his company offers.
I don’t agree with him on this point, but I believe investors can do worse — much, much worse — than invest in Vanguard’s total market funds.
Bogle had some interesting observations about typical Vanguard investors, the company’s target-date funds and how downright cheap he is when it comes to spending money. You’ll find that and more in the second installment of this two-part series.
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Richard Buck contributed to this article.